This article describes adjustments that should be made to terminal cash flow that is used to derive terminal value. The adjustments are made to reflect various factors that become stable with stable growth rate. The adjustments to stable cash flow include Stable Capital Expenditures, Stable ROIC relative to WACC, Stable Deferred Taxes and Stable Working Capital all of which depend on the assumed terminal growth rate. For example, if the terminal growth rate in EBITDA is higher, then the amount of capital expenditures is also higher.
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This file below demonstrates issues associated with capital expenditures in the terminal value. It demonstrates that you should adjust the terminal value with capital expenditures to depreciation and that the stable ratio depends on both nominal terminal growth and the depreciation rate.
Ratio of Cap Exp.xlsm
Stable Ratio Analysis.xlsm
Exercise 4 – Free Cash Flow Exercise.xls
Stable Cap Exp to Depreciation with Historic Growth.xlsm
Stable Cap Exp Ratio.xlsm
Stable Working Capital.xlsm
Stable Cap Exp Ratio Closing Balance.xlsm
This file below demonstrates issues associated with working capital in the terminal value calculation. It demonstrates that you should adjust the terminal value with a formula the begins with the working capital to EBITDA and adjust the formula with the growth rate.
This file below demonstrates issues associated with deferred taxes in the terminal value calculation. It demonstrates that in the same way that capital expenditures should be adjusted in the terminal value analysis, the same kind of adjustment should be made to deferred taxes.
Long-term Proof of Accounts Payable and Cash.xlsm
Proofs of Equity Value and Enterprise Value Bridge.xlsm